March 8, 2021

The Haggler: Discount Hotel Rates Raise Question of a Tax Dodge

Q. In June, I used Priceline’s “name your own price” service and bid $70 per night, for a hotel room in Seekonk, Mass. Under the terms, I was to pay $70 per night, plus taxes and service fees.

When I checked out of the hotel, I was given a receipt, but by accident, the hotel gave me a receipt with the rate it had charged Priceline for my room, rather than what Priceline had charged me.

I didn’t hang on to the receipt, unfortunately, so I can’t be specific. But Priceline was charged much less than $70 per night, which is no surprise. The company earns its profit by giving me a good deal, negotiating an even better deal with the hotel, and then pocketing the difference. Fine.

What caught my attention, though, was that the receipt for Priceline included tax and service fees, and even with those fees added in, the total nightly rate was less than $70.

My question is this: Why was I charged taxes and fees, over and above the $70 a night rate I paid, if Priceline also paid taxes and fees, albeit at the lower, discounted rate?

I have the feeling that I was taxed twice. Unless, that is, Priceline remitted both the tax I paid and the tax it was charged by the hotel, which I kind of doubt.

I’m thinking this can add up to big money for Priceline and other retailers who negotiate lower rates and then pocket the tax it charged customers.

What do you think a prudent consumer should do next?

Ellen Jaffe

Rego Park, N.Y.

A. Ms. Jaffe, it turns out, has stumbled across an ongoing skirmish that is quietly being fought in courts and state legislatures across the country. But the fight isn’t really about whether customers are being taxed twice. It’s about whether the online travel companies are paying their fair share of tax.

Brace yourself. We will be doing some math.

Ms. Jaffe, according to a receipt e-mailed by Priceline, paid a total of $37.83 in “taxes and fees” for her three-night stay. How much of that was tax? Priceline will not say. According to the company, that’s a secret that hotels urge it to keep, on the theory that if guests knew just how deeply they discounted rooms, nobody would pay full price.

As a result, it’s impossible to know exactly how much of that $37.83 was tax and how much fees. Regardless, Priceline says that Ms. Jaffe paid tax once — an unknown portion of that $37.83.

Which gets us to the fair share question.

First, some arithmetic. Imagine that the hotel charges Priceline $40 a night for Ms. Jaffe’s room. To keep this simple, let’s say sales tax in Massachusetts is 10 percent. Priceline could, theoretically, collect tax from people like Ms. Jaffe at the $70 a night rate, which for a three-night stay would come to $21 dollars (three times $7). But it could render unto Caesar $12 (three times $4). The difference, $9, could be Priceline’s to keep.

Are the travel companies actually padding profits this way? Depends on whom you ask.

Priceline and other companies readily acknowledge that taxes are remitted on wholesale rates that they are charged by hotels. (In the case above, that would be $4 a day.) That is fair, they say, because online travel companies don’t actually own any rooms; they are merely connecting customers and hotels. Typically, retail tax rates apply to the operator of a hotel. Priceline does not operate any hotels. Ergo, taxes are remitted at the lower rate.

But dozens of counties and cities have sued online travel companies in recent years, contending that the markup they charge — the difference between the wholesale rate that companies like Priceline pay hotels and the retail rate they charges their customers — ought to be subject to tax.

So the question here boils down to this: What exactly is Priceline’s markup? Is it a service the company provides (in which case, it can be labeled a fee and is not subject to tax), or does it reflect the price for a room charged by the hotel (in which case it can be taxed).

Darrel J. Hieber, a lawyer who represents Priceline, notes that online travel companies have won favorable rulings in 14 of the 18 cases that have been adjudicated. Which is another way of saying that more than a dozen courts have decided that the travel companies are complying with the law.

True, says Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities, which researches policy issues with an eye to the needs of low-income families. But many of those laws, he says, were written before online travel companies — which are a new type of business, created by the Internet — were born. Unlike travel agents, Priceline books the room and collects money. The markup in most brokered transactions, Mr. Mazerov notes, are subject to tax.

“If you buy a piece of art at auction for $100, and $20 of that price is the commission for the auction house, tax is paid on the full $100 purchase price,” he says. “That $20 commission is part of the price and it’s subject to tax.”

ARE we talking about huge, budget-altering piles of money here? Nope. But the sums are large enough to have prompted both North Carolina and New York to change their laws so that online travel companies remit more tax in the future.

O.K., enough about taxes. In our next episode, it’s back to straight up consumer griping.

E-mail: Keep it brief and family-friendly, and go easy on the caps-lock key. Letters may be edited for clarity and length.

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